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The deduction of tax at source (TDS) has been very helpful in the collection of taxes in the country by targeting the source of income itself. TDS eases the taxpayer’s burden of paying tax when it is time to file their income tax returns. That is because, at the time of filing income tax return they can take the credit for the taxes deducted at source.
One of the most important and common type of payments that a business entity makes is towards professional fees or fees for technical services. Some illustrative examples of professional fees are fees paid to a lawyer, doctor, engineer, architect, chartered accountant, interior decorators, advertisers, etc. Technical services would include the rendering of managerial, technical or consultancy services. Such payments made to residents are covered under section 194J.
The type of payments to residents covered under this section are as follows:
It implies the services provided by a person for carrying on medical, legal, architectural, or engineering professions. It also includes accountancy, advertising, interior decoration, technical consultancy or any other profession notified by CBDT Board under Section 44AA.
CBDT has, to date, notified the profession of a film artist, company secretary, and authorised representatives under Section 44AA.
CBDT has further notified sportspersons, commentators, event managers, anchors, umpires and referees, physiotherapists, coaches and trainers, team physicians, and sports columnists under Section 194J.
As per income tax rules, ‘fees for technical services’ means managerial, technical, and consultancy services but does not include payments considered as Salary by the recipient of such income.
As per the Supreme Court’s judgment, technical service would include services provided by a human. It would not have any service provided by machines or robots.
Royalty means the payment made for:
Non-Compete Fees imply the payment made in cash or kind in return for an agreement that binds them from sharing any license, patent, trademark, franchise, know-how, commercial or business rights, or information likely to be utilised elsewhere for processing, manufacture, or any other provisional service.
Every person making a payment in the nature of fees for professional or technical services is liable to deduct tax at source. However, below persons are not liable to deduct TDS on such payments:
To put it simply, all entities (other than individuals/HUF who are not required to do tax audit in the preceding year) need to deduct tax (TDS) while paying fees for professional or technical services.
|Nature of payments||Rate of tax deduction|
|Any payment of fees for technical service||2%|
|Payments made to operators of call centres||2%|
|Payment of royalty for sale, distribution or exhibition of cinematographic films.||2%|
|All other payments covered under this section (Like Professional Services)||10%|
|Payee does not furnish his/her PAN||20%|
The tax should be deducted at the time of-
Example 1: Mr. Jay has availed professional service from Mr. Veer in F.Y. 2021-22. First payment was in April month of Rs 55,000 and second payment was in December month of Rs 22,000. Let us check the TDS liability for both the payments for the F.Y. 2021-22 in three scenarios:
Analysis of situation 1
Since Mr. Jay is not liable for Tax Audit u/s 44AB he is not liable to deduct tax while making payment to Mr. Veer.
Analysis of situation 2
Though Mr. Jay has taken professional service but that was for personal purpose. Hence, no TDS is required to be deducted while making payments for such services.
Analysis of situation 3
If Tax Audit is applicable to Mr. Jay and he avails the professional services for business purpose, then TDS @10% must be deducted at Rs. 55,000 while making payment or credit in the accounts, whichever is earlier. . This is because the transaction has exceeded the threshold limit of Rs. 30,000.
Similarly, since the transaction amount has exceeded the threshold limit in the financial year, TDS should be deducted for all the payments made to Mr. Veer. Hence, tax shall be deducted at source on second payment of Rs. 22,000 also.
Example 2: A Badminton Club has engaged Mr Pravin, a resident in India, as its coach at a remuneration of Rs 10 lakh per annum. Whether the club liable to deduct TDS from such payment?
Services provided by coaches for sports activities are notified as professional services under section 194J. Also, the amount of remuneration is more than Rs 30,000 per annum. Therefore, the Badminton Club is liable to deduct TDS under section 194J from the remuneration payable to the Coach, Mr Pravin.
Not deducting the tax or late deduction of the tax has a two-fold consequence:
|Non – Government deductors||Deductors from the office of government|
|Payment made before 1st March||7th day from the end of the month||7th day from the end of the month|
|Payment made in the month of March||April 30th||Payment of tax is made on the date of payment of professional or technical fees to the payee but the corresponding challan is deposited by the 7th day from the end of the March month|
You can verify your TDS details by collecting Form 16 from deductors or from Form 26AS through TRACES utility or income tax e-filing website.
The company’s director provide managerial services. Hence, any sum payable or paid to the director as sitting fees, remuneration or any other sum (other than in the nature of salary) will attract the provisions of section 194J. Managerial services are technical in nature, hence 2% TDS should be deducted for payment of fees for technical services.
Since the limit did not exceed for the first time, No TDS should be deducted on Rs. 10,000. However, the threshold limit of Rs 30,000 (for professional services) is crossed while making payment for the second time. Hence, TDS shall be deducted at total Rs. 60,000 (Rs 10,000 + Rs 50,000) at the rate of 10%.
Section 194J governs the TDS provisions related to specified services. Any person paying fees to any resident person for these specified services (professional, technical, etc.) is required to deduct TDS under Section 194J.
Any person, except individual and HUF ( individual and HUF will be liable only if they are liable to audit under Section 44AB), who makes payment to a resident for any professional or technical services is required to deduct TDS
TDS is required to be deducted under Section 194J if the payment towards professional or technical services covered under this section exceeds Rs 30,000 per annum.
Services covered for TDS deduction under Section 194J are professional services, technical services, royalty, remuneration paid to directors of the company (excluding salary), non-compete fees.
Modelling may be a profession, but it is neither defined as a profession under Section 194J of the Income Tax Act nor notified by CBDT. Hence, Receipts of an individual’s modelling and acting skills do not attract TDS under the said Section 194J unless they are part of the production of a cinematographic film.